CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange settled higher Thursday, reversing off new multi-month lows including a break below $50 bbl by West Texas Intermediate that triggered buying during volatile early session trading.
Support for oil futures was also underpinned by news speculating Russia would align with Saudi Arabia and agree to reduce oil production in 2019. Russian President Vladimir Putin is scheduled to meet with Saudi Crown Prince Mohammed bin Salman at the Friday-Saturday G-20 meeting in Buenos Aires.
Russia had resisted calls earlier this month by Saudi Oil Minister Khalid al-Falih for a 1.4 million bpd production cut by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers led by Russia for 2019 to offset projections for rapid global oil inventory restocking next year. The Saudis earlier this month estimated supply would top demand by 1.0 million bpd in 2019.
The latest plan is to extend the OPEC+ cuts agreed to in 2016 that are set to expire at year's end into 2019, with output now well above the agreement. Saudi Arabia, which pumped at a record high 11.0 million bpd in early November to offset lost Iranian oil barrels amid U.S. sanctions on Iranian oil exports that took effect Nov. 5, would cut 1.0 million bpd under that guidance.
A reduction by Saudi Arabia won't be enough to hold inventories down however, with pipeline completions in the United States expected in late 2019 potentially unleashing another wave of higher U.S. oil production, with output at 11.7 million bpd in November according to the Energy Information Administration. There's also concern that slowing economic growth globally will dent demand in 2019.
The Saudis are seeking a united front by OPEC+ in combatting this scenario and to boost oil prices, with WTI trading at a better than 13-month low at $49.41 bbl and Brent at a $57.50 bbl 13-month low. OPEC+ meets Dec. 6 in Vienna.
Several analysts expect a decision on 2019 oil production by OPEC+ will be made this weekend, with market observers noting the world's three largest producers -- the United States, Russia and Saudi Arabia -- now control the market.
The G20 meeting is also seen as consequential for the demand side, as U.S. President Donald Trump will meet with Chinese President Xi Jinping, when the leaders of the world's two largest economies will discuss U.S. demands that China adjust its trade policy. Trump had already said he is set to slap additional tariffs on Chinese imports in January if a deal with Xi can't be reached, escalating the trade dispute. Some suggest it could create a cold war between the two countries.
"In China, investors were concerned about the apparent slowing of economic expansion and the implications of continued trade tensions with the United States. Chinese stock price indexes declined further over the intermeeting period and were off nearly 20% on the year to date," stated minutes from the early November Federal Open Market Committee meeting released Thursday afternoon.
The Wall Street Journal is reporting that U.S. and Chinese officials are considering a plan that defers the tariffs until spring to allow more time to discuss an agreement that would include meaningful changes to China's economic policy.
Another headwind for oil futures, as well as for U.S. economic growth, is expectations that the Federal Reserve will hike the federal funds rate 25 basis points from a 2.0% by 2.25% range when they meet Dec. 18-19. Tightening U.S. monetary policy is seen as slowing U.S. economic growth as borrowing costs increase while the accompanying stronger U.S. dollar also affects global economies with debt tied to the dollar. Equities sold off sharply in the fourth quarter through early this week.
"On balance, the turbulence in equity markets did not leave much imprint on near-term U.S. monetary policy expectations. Respondents to the Open Market Desk's recent Survey of Primary Dealers and Survey of Market Participants indicated that respondents placed high odds on a further quarter-point increase in the target range for the federal funds rate at the December FOMC meeting; that expectation also seemed to be embedded in federal funds futures quotes," stated FMC minutes.
Fed Chairman Jerome Powell on Wednesday triggered a rally in equities after suggesting a slowdown in tightening monetary policy, although a rate hike in December might be a foregone conclusion.
Amid the multitude of uncertainty ranging from oil supply to demand and what are increasingly overarching geopolitical positions affecting market fundamentals, speculators, who have reduced a net-long position to a one-year low, are less likely to take on new long positions. That view intensifies as we approach year-end book squaring.
At settlement, NYMEX January WTI futures were up $1.15 at $51.45 bbl. ICE January Brent futures gained $0.75 to $59.51 ahead of expiration Friday afternoon, with February delivery at a $0.40 premium.
NYMEX December ULSD futures edged 0.52cts higher to $1.8436 gallon with one day left on the board, and the January contract held a 0.42cts discount to December. NYMEX December RBOB futures rallied 5.68cts to $1.4547 gallon in an outside day up session, widening its premium with January delivery to 2.48cts ahead of expiration at Friday's close.
Brian L. Milne, 1.609.371.3328, firstname.lastname@example.org, www.dtn.com. (c) 2018 DTN. All rights reserved.
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